Optimism Grows Amid Stable PCE Data, Yet Tariff Concerns Persist

Early trading in the US saw a lift in risk sentiment following the release of January’s Personal Consumption Expenditures (PCE) inflation data, which matched market expectations. This outcome has raised hopes that the Federal Reserve may have room to consider cutting interest rates within the first half of the year. Both the overall and core PCE inflation rates showed a slowdown, reinforcing beliefs that the trend of disinflation continues.

Currently, futures for the Fed funds rate indicate about a 70% probability of a 25 basis point rate cut in June, an increase from the previous week’s 63% prediction.

Despite this optimistic sentiment, questions remain about the sustainability of the recent gains in equity markets, as suggested by the rise in futures. The fragility of market sentiment is evident, particularly due to uncertainties regarding the US tariff policies. Investors are maintaining a cautious approach, concerned about the potential economic impacts stemming from these trade measures. Such uncertainties could eclipse any positive effects that the cooling inflation statistics might present.

In the currency exchange market, the US Dollar is on track to finish the week as the top performer. It is followed closely by the British Pound and the Swiss Franc. On the other end of the spectrum, the New Zealand Dollar (Kiwi) is currently the weakest currency, with the Australian Dollar (Aussie) and Canadian Dollar (Loonie) trailing behind, showing little indication of a turnaround. The Euro and Japanese Yen are fluctuating in the middle.

In the European markets, the FTSE index has gained 0.36% at the time of this writing, while the DAX and CAC indices have reported declines of 0.57% and 0.55% respectively. The UK’s 10-year bond yield decreased by 0.024 to 4.490, while the German 10-year yield fell by 0.026 to 2.394. Earlier in Asia, the Nikkei index fell by 2.88%, the Hong Kong HSI dropped by 3.28%, the Shanghai Composite index fell by 1.98%, and the Singapore Strait Times index decreased by 0.65%. Notably, Japan’s 10-year government bond yield decreased by 0.02 to 1.376.

US PCE Inflation Data Indicates Slowdown

The latest PCE inflation figures out of the US indicate a slight moderation in price pressures for January. Both the headline and core PCE indices grew by 0.3% month-over-month, which aligns with what analysts had anticipated.

Year-over-year, headline PCE inflation has decreased to 2.5%, down from 2.6%. Similarly, core PCE inflation has eased to 2.6%, down from 2.9%. This data reinforces the perception that disinflation is making progress, even amid persistent pressures in some sectors.

While inflation is cooling, signs are emerging of strain in the consumer sector. Personal income increased significantly by 0.9% month-over-month, outperforming expectations of just 0.3%. However, personal spending unexpectedly fell by 0.2%, missing the projected increase of 0.2%.

Canada’s GDP Growth Falls Short

In Canada, the GDP grew by 0.2% month-over-month in December, which was below the expected 0.3% increase. Both services and goods-producing industries contributed to this growth, marking the fifth time in the last six months that an increase was noted. Out of 20 industrial sectors, 11 reported growth.

Looking forward, preliminary indications suggest that Canada’s GDP may have expanded by 0.3% month-over-month in January, driven primarily by sectors such as mining, quarrying, oil and gas extraction, along with wholesale trade and transportation. Unfortunately, retail trade remains a weak link in this growth narrative, partially counteracting gains.

BoE’s Deputy Governor Discusses Inflation Risks

Dave Ramsden, Deputy Governor of the Bank of England (BoE), has recently changed his outlook on inflation. He no longer regards the risks to achieving the 2% inflation target as solely skewed to the downside. Instead, he perceives the risks of inflation as “two-sided,” acknowledging potential scenarios that may lead to both inflationary and disinflationary outcomes.

Ramsden has expressed concerns regarding the sluggish pace of economic growth in the UK, suggesting that the economy's supply capacity might be weaker than previously estimated by the BoE. Should this be accurate, it may result in a lower growth “speed limit” for the UK, leading to ongoing tight labor market conditions and sustained wage pressures, which could lead to persistent domestic inflationary trends.

Switzerland’s KOF Economic Barometer Declines

According to recent data, Switzerland’s KOF Economic Barometer fell from 103.0 to 101.7 in February, missing predictions of 102.1. This decline suggests a weakening economic momentum, with most sectors on the production side feeling increased pressure. Manufacturing and services were reported to have undergone the most significant downturn, though some stabilizing factors such as resilient private consumption and foreign demand have offered some cushioning effects.

Bank of Japan Comments on Rising Yields

During a parliamentary session, Deputy Governor of the Bank of Japan (BoJ), Shinichi Uchida, noted that the recent rise in Japanese Government Bond (JGB) yields reflects market perceptions regarding the economic outlook both domestically and globally. Ruhida reaffirmed that there would be no change to their approach regarding short-term policy rates or government bond operations, emphasizing that their bond holdings continue to act as a potent monetary easing mechanism for the economy.

When questioned about the likelihood of future rate hikes and tapering influencing yields, Uchida stated this is dependent on market sentiments and pressures.

Tokyo CPI Data and Production Adjustments

Tokyo's core Consumer Price Index (CPI), excluding food, increased at a slower rate of 2.2% year-over-year in February, down from 2.5% and below market expectations of 2.3%. This marks the first decline in four months, primarily attributed to the reintroduction of energy subsidies. Conversely, the core-core CPI (excluding food and energy) remained stable at 1.9% year-over-year, while the headline CPI decreased from 3.4% to 2.9% year-over-year.

In terms of industrial performance, production has contracted by 1.1% month-over-month in January, a decline that was sharper than the anticipated decrease of 0.9%. Manufacturers surveyed by Japan’s Ministry of Economy, Trade, and Industry expect a strong rebound of 5.0% month-over-month in February, followed by a slight decrease of 2.0% in March.

On the consumer side, retail sales in January rose by 3.9% year-over-year, slightly below the expected 4.0% but still reflecting relatively sturdy domestic demand.

Sentiment, Inflation, Economy